Hays plc (HAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Hays plc Trading Update for the 3 months ending 31st December 2024 conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Kean Marden, Head of Investor Relations. Please go ahead.

Thank you, Nadia. Good morning, everyone. Thank you for joining us on a particularly busy day, and Happy New Year. I'm Kean Marden, Head of Investor Relations, and I'm joined here today by James Hilton, Chief Financial Officer, to present Hays' Q2 '25 results. Before we begin, please be aware that this call is being recorded, and the replay is accessible using the number and code provided in the release. Please be aware that our discussions may contain forward-looking statements that are based on current expectations or beliefs as well as assumptions on future events. There are risk factors which could cause actual results to differ materially from those expressed in or implied by such statements. Hays disclaims any intention or obligation to revise or update any forward-looking statements that have been made during this call regardless of whether these statements are affected by new information, future events or otherwise. I'll now hand you over to James.

Thank you, Kean. Good morning, everyone, and thanks for joining us today. I'll present the key points and regional details of today's trading update before taking questions. As usual, all net fee growth percentages are on a like-for-like basis versus prior year unless stated otherwise. Group fees decreased by 12% with Temp & Contracting down 7% and Perm down 19%. The group's December growth rate was in line with the quarter overall at minus 12%, and Perm slowed through the quarter and exited at 20% down, while Temp & Contracting was more resilient and exited at minus 5%. I would highlight the following key items from the results. In our Temp business, fees decreased by 7% with activity levels sequentially stable through the quarter. Group average Temp volumes decreased by 6% year-on-year, including Germany down 8%, ANZ down 15%, UK&I down 12% and EMEA up 3%. Perm fees decreased by 19% driven by volumes down 21%. This was partially offset by an increase in our average Perm fee of 2%. Perm markets in EMEA, U.K. and Ireland and Germany became more challenging through the quarter and markets were subdued but stable elsewhere. Our Enterprise business was strong and net fee growth accelerated to 12% in Q2, driven by resilient performances in MSP contracts and several new client wins. Consultant productivity was up 4% year-on-year, driven by our continued focus on operational rigor and resource allocation. Consultant headcount reduced by 2% in the quarter and is now down 15% versus prior year. Our initiatives to deliver structural savings of circa GBP 30 million per annum by the end of FY '27 are progressing well. And, consequently, our periodic cost base has improved to circa GBP 77 million from around GBP 80 million in Q1, representing a circa GBP 2 million underlying reduction and a modest benefit from exchange rate movements. The group's net cash position of around GBP 25 million, in line with our expectations, was after paying a GBP 33 million dividend in the quarter, a GBP 13 million upfront cash contribution related to the defined benefit pension buy-in and a circa GBP 5 million cash impact from exceptionals. I'll now comment on performance by each division in more detail. Our largest market of Germany saw fees down 13% year-on-year. Temp & Contracting fees decreased by 10%, in line with our expectations. We continue to see greater resilience in contracting, where we believe we are taking market share but more challenging markets in Temp, where we have a greater exposure to the automotive sector. Temp margin and mix was up 3% versus prior year and, as I mentioned earlier, volumes declined 8%. Client cost controls once again drove a 5% reduction in average hours worked, but the comparable eases in the next quarter. In Perm, activity levels remain subdued and fees decreased by 27% as client decision-making slowed through the quarter. And at the specialism level, Technology and Engineering, our two largest specialisms, were down 13% and 18%, respectively. Accounting & Finance was more resilient and down 3%, and Construction & Property was up 12%. Consultant headcount decreased by 3% in the quarter and by 13% year-on-year. In U.K. and Ireland, fees decreased by 14%. Temp decreased 11% but was sequentially stable, and Perm slowed through the quarter with fees down 19%. Fees in the private sector declined by 10%, while public sector was tougher with fees down 21%. At the specialism level, Accounting & Finance and Technology decreased by 13% and 22%, respectively; Construction & Property was down 5%; although Enterprise performed strongly and was up 11% driven by volume growth in existing contracts and new wins. In Ireland, our fees decreased by 30% against a challenging market, and our consultant headcount decreased by 6% in the quarter and 17% year-on-year. In ANZ, fees decreased by 14% year-on-year. While market conditions remain challenging, activity levels were sequentially stable through the quarter. Temp decreased by 9%, with Perm down 23%. The private sector decreased by 11% with the public sector down 18%. And at the specialism level, Construction & Property decreased 13% while Accountancy & Finance and Technology decreased by 20% and 10%, respectively. ANZ consultant headcount was down 2% in the quarter and down 20% year-on-year. In our Rest of World division comprising 28 countries, fees decreased by 9%. Temp fees were down 3%, but Perm declined 16%. In EMEA ex Germany, Temp & Contracting fees declined by 1% year-on-year and were sequentially stable; but Perm, down 21%, slowed in several countries through the quarter. In France, our largest Rest of World country, fees were down 21%, and we saw a clear step down in Perm activity during the quarter. In Americas, fees increased by 2%. We saw a return to growth in the U.S., up 7% and accelerating growth in Canada, up 10%. Both businesses are seeing improving momentum, particularly in the enterprise market. LATAM was down 26% and was more challenging. Asia net fees decreased by 6% with mixed but overall stable activity through the quarter. Net fee growth in Mainland China continued to accelerate, increasing by 18% in the quarter, although Hong Kong remained tough, down 38%. For Rest of the World as a whole, consultant headcount increased by 1% in the quarter, although it is down 13% year-on-year. Before moving to current trading, I wanted to take a few moments to update you on our initiatives to build a structurally more profitable and resilient business, underpinned by our culture and talented colleagues worldwide. Through our Five Levers, we'll achieve this by increasing our exposure to the most in-demand future job categories, growing industries and end markets, higher skills and higher paid roles, non-permanent recruitment and large enterprise clients. Our strategy is not one size fits all, and we will tailor each region and country to its market and customer needs. Despite challenging markets, we are delivering on our strategy, have made good progress in the quarter. Consultant fee productivity increased by 4% year-on-year. Net fee growth in Enterprise accelerated to 12%, and our structural cost saving initiatives are progressing well. Within Temp & Contracting, net fee growth exited the quarter at minus 5% and year-on-year growth was positive in 5 of our 8 focus countries in Q2. Business line prioritization, optimized resource allocation and scaling our 8 focused countries will establish a broader base and enable the group to return to and then exceed our previous peak profits of GBP 250 million. Moving to current trading and guidance, and I would highlight the following. We expect H1 pre-exceptional operating profit of circa GBP 25 million towards the lower end of the consensus range. Given ongoing economic uncertainty, our new year Temp & Contracting return to work will again be particularly important in FY '25, and we are closely monitoring activity levels. But it is too early at this stage to gain meaningful trends. It is also too early to say if Perm weakness in EMEA, U.K. and Ireland and Germany through the quarter reflects a more sustained market slowdown or shorter-term deferral of clients and candidate decision-making. However, we expect near-term market conditions to remain subdued. In countries where we see headwind to net fees, we will continue to focus on improving productivity. Elsewhere, we are modestly adding headcount in North America and parts of Asia where activity levels and net fees are increasing. Overall, we expect consultant headcount to remain broadly stable in Q3, and we continue to work on our back-office efficiency programs. At a group level, there are no material working day effects in H2 '25. However, Easter falls entirely in Q4, while in FY '24, it was split evenly between Q3 and Q4. We expect this to have around a 1% positive impact year-on-year on fee growth in Q3 with a corresponding circa 1% headwind to Q4. Overall, while it is difficult to predict timing, we know our markets will recover. And when they do, we'll be firmly focused on delivering the high drop-through of fee growth to profit growth. I'll now hand you back to the administrator, and we're happy to take your questions.

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Simon LeChipre from Jefferies.

Three questions, if I may. First of all, on the fee rate. So it seems it's still holding up well overall. But could you comment on the trends across your key markets? And is there any countries actually showing a different pattern or if the trends are broadly the same across the board? Secondly, across Europe, so obviously still a tough backdrop, but could you perhaps comment from a sector perspective on the trend you're seeing across your key markets and particularly any market facing any incremental weakness through the quarter? And lastly, could you comment in a little bit more detail on the U.S. performance? And I mean, you mentioned the Enterprise business doing well. But did you see any improvements of the underlying trends outside of this Enterprise business as well?

Thank you, Simon. So I'll start off with the fee trends across our key markets. And I guess I'll to try be sort of consistent, I guess, on the Temp & Contracting theme that we're seeing across the group, which is a stable quarter overall. So if I look at the Temp volumes and also the Temp fees across the quarter, we're pretty much in line with where we were in Q1 and pretty much in line with where we were in Q4 of the previous financial year. That hasn't changed that much by region. If I just pick our major markets, in turn, Germany is our largest business. And as you know, we've had negative hours issue in Germany now. This is the fourth quarter we've had that. But it is a pretty stable trend and we had a 5% headwind there. And volumes are down 8% in Germany, which is consistent with where we were in the previous quarter. I'd say, overall, the Contracting business continues to outperform the Temp business, but both of them felt pretty stable through the quarter and in line with our expectations. And we're continuing to see the benefit of improved mix and margin and day rates overall as well. Australia and New Zealand was pretty -- I should say the other thing about Germany, we saw a decline in the Perm through the course as well, consistent with what we saw in Europe and in the U.K. Australia and New Zealand, stable. So pretty stable trends overall both in Temp and in Perm. And in the U.K., stable trends in Temp & Contracting, but clearly Perm slowed through the quarter, and an element of that slowdown was in the public sector where markets are pretty challenging. So I mean, those are our three major markets, and hopefully, it gives you a feel for how the temp versus contracting overall. What I would highlight is in some of our eight Focus countries, outside of the three key markets, we're continuing to see really good progress overall in our Temp & Contracting businesses, so five of our eight countries -- of our eight Focus countries were in year-on-year growth in the quarter in Temp & Contracting. I think that's a pretty good performance overall in this market. So we're pleased with the progress that the teams are making around the world, and that's, as you know, part of our key strategy. Actually, just picking up the second question on Europe, what are the key themes we've seen there. I think, actually, if I look across our European business, our Temp business is performing well. It's not as -- we're still heavily weighted towards Perm, but that Temp business is growing quite well. And as I said before, a number of our countries are moving forward in Temp & Contracting, which is important. But Perm did get more challenging through the quarter in a number of markets, notably France, we saw a slowdown in November and into December there. As I mentioned before, Germany got tougher in Perm. And other pockets of Northern and Eastern Europe were more challenging through the quarter in Perm. Actually, Southern Europe continues to be pretty resilient. And Spain, for example, is in year-on-year growth. We continue to perform well in Italy, Portugal. So Southern Europe continues to be more resilient, and the business is performing really well there. Happy with that. Northern Europe and Eastern Europe, more challenging. And the final question was on the U.S. performance. And pleasing that we're back in year-on-year growth in the U.S., and that's important. Where are we seeing the improvement is in our Temp & Contracting business, where we're up 7%. That's encouraging. Our Perm business is pretty flat. It's a pretty stable trend in Perm, but it's certainly bumpy, and it's not a clear sign yet that we're seeing improving momentum. And within Temp & Contracting, we're seeing more of the growth in our Enterprise accounts, which performed strongly through the quarter and less momentum in the spot and the SME land. But overall, I'm pleased with where the U.S. business has gone. I'm very pleased at how that business has performed at the bottom line. We've had a year-on-year improvement of about GBP 5 million in the half. So this time last year, that business wasn't making money. This time this year, we're making good amounts of money in that business. So we've had a really good improvement there under management, a really good focus on the business. We've retrenched the operations and really doubled down on our core business there. And I think the guys have done a great job.

The next question comes from the line of Remi Grenu from Morgan Stanley.

A few, if I may. So the first one is on the additional weakness in Q2, which seems to be concerned mainly Perm in Europe, concentrated on that. Can you add anything whether this is data points, discussions with clients here in this pipeline of activity or anything else which would give more information on really this debate on whether this is a near-term bump or more structural decline which we should extrapolate over the coming quarters? I appreciate it's a tough question but still. A similar question on what you're referring to in the press release to the return to work in Temp & Contracting. I know it's early in the year, but if you could elaborate on that, how you're monitoring it and what you're seeing there. And any indication on how things are evolving going into 2025? And the last one is on the Enterprise business, which has grown nicely. Can you just remind us how much of group net fees it represents? And on the comments on what's driving that, is it really only the MSP contract driving the delta versus the rest of the group? Or are there any other factors in there? And the contract wins you're referring to, are these from competitors or first-time MSP contract or outsourcing?

Right. Okay. I'll start off then in Europe on the question on Perm weakness and what's really behind that. Well, it's different in each country is the honest answer, and also the trends are different in each country. But I think what we have seen is a sensitive economic environment. I think it's clear to see across the Eurozone that the economic data is fragile. And I think we're seeing relatively fragile data in PMI and some of the other consumer confidence indices. And I don't think that's changed dramatically over the last 6 or 9 months. I think we've seen areas of political instability. And that, again, for us is always a -- it always has an impact in our Perm businesses as companies really stop -- slow down or stop making their decision-making. And that is a challenge. So getting deals over the line has been increasingly more difficult in, as I say, Northern and Eastern Europe through the quarter. There's still good levels of activity going on there. So if I look at the number of jobs that are coming in through the quarter, it was down a little bit in November. And as you'd expect in December, that comes down anyway. And I wouldn't say the decline in December was any more than I would normally expect. What we're seeing is getting those deals over the line is taking longer because of slowdown in decision-making. And that's what leads into the uncertainty and the other part of your question, which is the outlook. And how much of that business has been deferred and will come back in the new year, maybe a bit of it. But I do think some of it is gone. But then the broader question is, are we going to see a more sustained lower level of demand and activity and placements going through into the new year. And I think that's where I don't have a full view really at this stage and will probably pick that up and have a better discussion in February at our half year or, okay, how did January pan out, and how does February look and what's the outlook for March. And I think at this stage, I don't really have a view on whether we're at a new or lower level of activity in Europe. Return to work, second question, is, again we're at an early point really for me to be making the call. I've only got one week of time sheet data this year that Christmas was slightly later. And so that first week back is probably a little bit clouded by the timing of when people are actually at work and not. So I think what I could say at this point is, obviously, we look at the number of finishes, and we have a view on how many people finish their contracts at Christmas because a lot of our businesses have breaks. That's in line, nothing unusual there. I'm not seeing a difference in trend on the people that sort of finished at the end of December. So that's the first data point I look at. And then there's clearly the second data point we look at is at week on week on week, what's the rebuild in the volumes. Normally, we'd expect to get to pre-Christmas levels by mid to late March. At this stage, I've got one week of data and I just don't have a view yet how that pans out. So again, I'll talk about that a bit more in February. And the final question was on enterprise, but overall what are the trends we're seeing in the Enterprise business. And our Enterprise business is about 20% broadly of our group net fees. So it's a material part of our business and also an important part of our strategy and the business going forward, and it's good to see that we're on year-on-year growth. So what's driving that? I think there's three factors. First of all, we're seeing resilience in MSP and in larger end of town generally. So our large corporates are more resilient than the SME markets in the majority of the markets we're operating in. I think secondly, we're starting to see some real progress and benefits from taking market share within our large MSP accounts. And I've spoken before about when you take on a new MSP, you get a large supply chain, which is largely third party, and our task is to then convert as many of those temps over time to be our own direct supply. And clearly, on day one, you can have a large supply chain which is going from another agency. And over time, you'd expect it to gain a lot of traction and build up your market share within that specific time. I think the team have done a really good job of that. Heavy levels of focus on improving our market share on the existing accounts. And the third factor is we've won a number of new accounts as well in the last 12 months, which have been coming online. That's clearly been positive for the performance in the quarter as well. And we've got a number of deals in the pipeline as well, which I'm confident about. So I think overall, our business has performed well. It's a core part of our strategy. So pleasing to know this piece moving forward.

The next question comes from the line of Afonso Osorio from Barclays.

I just have three as well, if I can. The first one is on Germany. You mentioned in your remarks, automotive being one of the key drivers of the weakness in the country. Can you just disclose your exposure to that in Germany? And obviously, with elections there soon, how do you see growth in the second half? That's the first question. The second question is on your exceptional costs and the GBP 25 million outlook in the first half. Maybe I missed this, but have you disclosed the P&L exceptional charge for the half? You mentioned the GBP 5 million cash exceptional. I'm assuming that's the same or broadly the same for the P&L, so the GBP 5 million. That's the second one. And then the third one is on the GBP 77 million run rate on costs. Do you think there's room to lower this further in the second half? And what's your view on headcount in Q3 and Q4? I think you mentioned probably upsizing a little bit in the U.S. and the other outperforming regions. But yes, if you can give us a sense of your plans for the headcount as well in the second half.

Great. Right, Afonso. Forgive me if I miss any of those, there's quite a bit in there, but I'll kick off with the Germany question and the autos. And it is an important part of our business, and we have a market-leading position in the autos in Germany. If I look overall, the auto business is about 10% of our Germany business, and it's specifically within our Temp business rather than our contracting business. So it's about 10% overall of our net fees. And as I talked about in the last trading update, the market in that is clearly more challenging and it's down about 40% year-on-year versus a broader business, which is clearly more resilient than that. What I would say is that I think we've seen a much more stable quarter. I think we were seeing more weakness in Q1, and I think we've seen a more stable quarter through Q2. I don't think it's going to return to growth anytime soon. But what we have had is certainly some market share gains in that sector, where a number of the large clients are coming to us and not the competitors? And I think we are taking share in that market, which is quite pleasing. And I think certainly supportive of the overall volumes we've seen in temp through the quarter. The other thing I would highlight there is that even though we've had some challenge in that sector, we've managed the bench really, really well. Clearly in Temp & Contracting, we do have a theoretical bench risk as we employ the temps rather than freelancers. And if you think back to the pandemic, we the factories literally shut overnight, we clearly had an impact there. And I think the team have done a really, really fantastic job of managing the bench incredibly well such that we haven't had any exposure at all. So that's been a really, really disciplined and pleasing performance from the guys. So yes, credit to them for doing that because it's not easy. Outlook for auto is, I mean, look, there's probably someone with a greater mind than mine who's got a better view on where the auto sector is going go globally over the next 6 or 12 months. I guess, we're managing the demand that we're seeing right now from our clients. And as I said before, it feels more stable. We're certainly not seeing any pick up there. And I think we'll see how the world pans out over the next 6 to 9 months with the world of tariffs or potential tariffs and demand from China and the U.S. and so on and so forth. There's a lot of factors there that will play into that equation. So I wouldn't like to make a call really on that in the second half. Second question was around costs, and the GBP 25 million that we guided for H1 is on a pre-exceptional basis. On a -- at this stage, we're still closing the books. So this could take a little bit of time to do that. I do expect the exceptional P&L charge in the half to be somewhere around the GBP 9 million to GBP 10 million level. Clearly, the GBP 5 million we referred to on cash exceptional is the amount in the quarter, and clearly that's the cash flow impact as opposed to the P&L impact of exceptionals in the half. So I expect the P&L charge to be in the GBP 9 million to GBP 10 million level. And then the third question was around cost run rate. And clearly, we -- I think we've done a good job through the half of sort of lowering that. Pleasing progress that we've made in a number of areas in some of the efficiency programs in back office across finance, across technology, some of the operational structures, some offices and so on and so forth. So I think we've made good progress there, around GBP 77 million or so. And clearly, look, that's I would say circa on a periodic cost base because it's not an exact science in a business. Month-to-month it does go up and down, as you would expect. But I have to look through the quarter and see where the underlying is, GBP 77 million is kind of where we are now. Where do we go in the second half? I would expect it to come down a little bit. I don't think it will come down too much because I think we -- first of all, we've made some really good progress on programs through the quarter, and I'll talk more about those in the half year results without going into too much detail now. As I said before and as guided in the statement, I expect our consultant headcount to be pretty stable through the next quarter. Overall, I think we'll see some businesses increasing their headcount, where markets are more supportive and we're confident. I think perhaps some other areas where we might pull back a little bit if we need to. But I think overall, broadly stable through the second half or certainly next quarter on headcount. And therefore, I don't expect to see a material change to the cost base. It may be come down slightly from 77%, but not materially so.

The next question comes from the line of Karl Green from RBC Capital Markets.